Fighting the Correction in the Worst Possible Way

Investors are waking up. They are wiping the sleep from their eyes. Behold! No recovery.

Analysts and the commentariat are struggling to make sense of it. With record low mortgage rates, and after eight programs designed to boost up housing, for example, sales are still plummeting. July saw the biggest monthly drop in existing house sales since the Johnson Administration.

The supply of houses for sales is growing – thanks to record foreclosures. The demand is falling. Prices will come down too.

It’s a Great Recession, say some.

It’s not a recession, it’s a depression, says David Rosenberg.

It’s a “Contained Depression,” says one headline at Seeking Alpha.

The recession never ended, says another headline.

Stocks will sink to 5,000, says a headline at CNBC.

Bloomberg takes a more moderate tone:

“Durables, Housing Signal Recession Risk.”

But you, dear reader, you want to know what is really going on. So we will tell you.

We begin with a detail from yesterday’s news: credit card debt has dropped to its lowest level in eight years. This tells us that the de-leveraging of the private sector is real…and on-going. And as long as it lasts, you can forget about a “recovery.”

This correction is a good thing. Consumers have too much debt. They’ll be better off when they get rid of half of it. But the feds want to fight this correction in the worst possible way. What’s the worst possible way? Adding more debt!

While the private sector de-leverages, the public sector leverages up. Eventually, this will have the result that everyone expects…bonds will crash, and the dollar will collapse…BUT PROBABLY ONLY AFTER PEOPLE STOP EXPECTING IT.

In the near term, the stock market is probably going down…it seems to be rolling over now. Yesterday, the Dow rose 19 points – a very weak bounce after so many down days.

When stocks go down, they will drag inflationary expectations. It will probably bring down stock markets in the emerging economies…possibly causing the Chinese economy to blow up…and bring falling commodities prices and deflation too. The idea of a “bond bubble” will disappear. People will see the “depression/Great Recession” as real…and permanent. They will try to protect themselves by buying US Treasury bonds. This will permit the feds to go further and further into debt.

Thus begins the world’s long day’s journey into night.

The US economy will become a Zombie Economy, with more and more activity dependent on government spending and government support. Banks are already Zombie Investors. Rather than lend to viable businesses that expand the world’s wealth, they borrow from the feds and lend the money back to them. We’ll see private investors become Zombie Investors too – putting nearly all their savings into US Treasury paper, just as the Japanese did.

The Dow will sink down towards 5,000. The feds will announce program after program to boost up the economy. Household savings rates will head to 10%. Unemployment will go to 12%…maybe 15%. Bond yields will collapse to new record lows. Ben Bernanke will threaten to drop money from helicopters…but as long as the US remains in an orderly decline, he will not dare to do it.

Eventually, the whole system will blow up in a spectacular fireball. But not until America’s investors are fully committed to US paper. Then, after having suffered huge losses in stocks and real estate, they can be finally ruined in what they thought were the safest investments in the world – dollar-based US Treasury bonds.

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

it is the only “safe” place outside the “mattress” guaranteeing you will have your money back

gold value is an illusion as anything else in depression time and will travel South faster than bonds

http://www.rampartsilver.com/ Rampart

Not so – one has only to look at Zimbabwe or Argentina to see what happens during a currency crisis. Gold and Silver revert back to their function as money.

mike horne

You can’t eat gold, nor are you going to shave off little bits to buy bread. Nor are you going to sell it when the currency is collapsing all around you. Gold isn’t worth anything if the surrounding currency isn’t worth anything either.

DRUNK AND DISORDERLY

Gold and silver are obviously uneatable, as is currency, but should have value after printed notes are worthless–and their value must fall as more are created. I’ll take silver as the most liquid medium of exchange.

It’s all about this need for a medium of exchange. Without it, there is no commerce, including food production, utilities, emergency or medical services. How do you pay a military without money, or pay taxes to support any form of government?

emdfl

We should only hope that unemployment will fall back to 12 or 15 percent…

GetReal

The idea that consumers are paying down debt is the biggest joke I have heard yet. So you’re telling me that the average American who ran up credit card debt in the 90’s, paid it down with their home equity loan by 2005, only to run it back up by the time they lost their job in 2009, is paying down debt with their EUC (extended unemployment compensation)! This big “debt deleveraging” comes from one thing only; banks are charging off seriously delinquent accounts & writing off the losses. On paper, there is less debt. Please don’t imply that it means consumers have gotten frugal. That will only happen in coming years, when they have NOTHING (no cash, no credit, no job). That’s when things will get interesting.

These suckers have dragged down the entire market for months. It’s been a tale of two Dows. The Dow Jones Transportation Average has dropped more than 8% on the year. But the Dow Jones Industrial Average has just about broken even over the same period. That shows you just how bad the trannies have been.

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